Final answer:
An increase in government expenditure is most likely to increase real GDP as it shifts the aggregate demand curve to the right. This effect results in greater economic output and potentially higher prices but does not shift the short-run aggregate supply curve.
Step-by-step explanation:
With an upward-sloping short-run aggregate supply curve, an increase in government expenditure will most likely increase real gross domestic product (GDP).
This is because increased government spending shifts the aggregate demand (AD) curve to the right, leading to a higher real GDP and an upward pressure on the price level.
This will not shift the short-run aggregate supply curve (SRAS) to the right, nor will it necessarily shift the long-run aggregate supply (LRAS) or the AD curve to the left. Instead, increased government spending typically results in higher output and potentially higher prices, assuming the economy is not already at potential GDP.
If the economy is at potential GDP, the AS curve becomes vertical, and any increase in AD due to higher government spending only leads to higher prices without an increase in real GDP, causing inflation. '
In contrast, a decrease in government spending would shift the AD curve to the left, leading to lower real GDP and potentially lower prices.